CTR Exemptions: Phase I and II Eligibility, Filing, and Safe Harbor

CTR exemptions let a bank, savings association, thrift, or credit union stop filing Currency Transaction Reports on a specific customer’s routine cash activity above $10,000, once that customer fits one of the categories FinCEN allows. Some customers qualify automatically because of what they are. Others qualify only after the bank verifies a track record and files paperwork. In every case the exemption covers only the customer’s own transactions through designated accounts, and it never suspends the duty to file a Suspicious Activity Report when something looks wrong.1Financial Crimes Enforcement Network. Guidance on Determining Eligibility for Exemption from Currency Transaction Reporting Requirements

What the Exemption Covers and Who Can Use It

Federal law requires financial institutions to report currency transactions over $10,000, including multiple same-day transactions by one person that add up past that line.2FinCEN. CTR Reference Guide For a business that deposits or withdraws large amounts of cash as part of normal operations, that creates a repetitive stream of reports. The exemption process is the relief valve.

Only depository institutions can designate exempt persons. Broker-dealers, money services businesses, casinos, and other categories of financial institution cannot.3Financial Crimes Enforcement Network. Reformed CTR Exemption Process – Questions and Answers The exemption covers only the exempt customer’s own transactions. If the customer conducts cash business as an agent for someone else who beneficially owns the funds, a CTR is still required.

Suspicious activity is carved out entirely. The bank must keep monitoring an exempt customer, and any transaction that looks suspicious must be reported through a SAR no matter what.1Financial Crimes Enforcement Network. Guidance on Determining Eligibility for Exemption from Currency Transaction Reporting Requirements

Phase I: Customers That Qualify Automatically

FinCEN sorts exempt persons into two phases. Phase I covers entities considered inherently low-risk because of their regulatory status or public transparency.4FFIEC BSA/AML InfoBase. Assessing Compliance with BSA Regulatory Requirements – Transactions of Exempt Persons

Other Banks and Government Bodies

Other banks (to the extent of their domestic operations) and government bodies are the simplest categories. Government bodies include any federal department or agency, any state, any political subdivision of a state, and any entity exercising governmental authority on behalf of one of those governments, such as a municipal utility district or an interstate compact agency.5eCFR. 31 CFR 1020.315 – Transactions of Exempt Persons No Designation of Exempt Person filing is required, and no annual review is needed.

Listed Companies and Their Subsidiaries

A company qualifies as a listed entity if its common stock or equivalent equity interests trade on the New York Stock Exchange, the American Stock Exchange (now NYSE American), or as a NASDAQ National Market Security on the NASDAQ Stock Market. Companies listed only on the NASDAQ Capital Market tier do not qualify. Where a listed entity is a financial institution other than a bank, only its domestic operations are covered.5eCFR. 31 CFR 1020.315 – Transactions of Exempt Persons

A subsidiary of a listed entity qualifies when it is organized under U.S. law and the listed parent owns at least 51 percent of its common stock or equivalent equity interests.5eCFR. 31 CFR 1020.315 – Transactions of Exempt Persons Unlike banks and government bodies, listed companies and their subsidiaries do require a DOEP filing and annual review, because listing status can change through going private, delisting, or merger.

Phase II: Non-Listed Businesses and Payroll Customers

Phase II covers private companies that handle cash legitimately but lack the public-market transparency of Phase I. Eligibility is stricter, and the exemption applies only to transactions through the customer’s designated exemptible accounts; cash activity through any other account still triggers a CTR.1Financial Crimes Enforcement Network. Guidance on Determining Eligibility for Exemption from Currency Transaction Reporting Requirements

Non-Listed Businesses

A non-listed business qualifies only if it meets every one of these conditions:

  • It is incorporated or organized under U.S. or state law.
  • It has maintained a transaction account at the bank for at least two months. The bank may shorten that period after a risk-based analysis that supports a reasonable belief the customer has a legitimate business purpose for frequent large cash transactions.1Financial Crimes Enforcement Network. Guidance on Determining Eligibility for Exemption from Currency Transaction Reporting Requirements
  • It has conducted five or more reportable currency transactions (over $10,000) within the past year.
  • No more than 50 percent of its gross revenue comes from one or more ineligible business activities.

The gross-revenue test is where most close calls sit. A business with mixed activities can still qualify as long as the ineligible portion stays at or below 50 percent, and the bank is not required to have the customer segregate commingled funds to make that call.6Financial Crimes Enforcement Network. Amendment to the Bank Secrecy Act Regulations – Exemptions from the Requirement to Report Transactions in Currency – Phase II

Payroll Customers

A payroll customer is a business that regularly withdraws more than $10,000 in cash to pay employees in the United States. The two-month account history and five-transaction requirements apply, but the ineligible-activity test does not, because the exemption attaches to the purpose of the withdrawal rather than the nature of the business.3Financial Crimes Enforcement Network. Reformed CTR Exemption Process – Questions and Answers

Ineligible Business Activities

The following activities disqualify a non-listed business from exemption if they account for more than half of gross revenue:

  • Serving as a financial institution or agent of one, including money services businesses
  • Buying or selling motor vehicles, vessels, aircraft, farm equipment, or mobile homes
  • Practicing law, accounting, or medicine
  • Auctioning goods
  • Chartering or operating ships, buses, or aircraft
  • Pawn brokerage
  • Gaming of any kind, other than licensed parimutuel betting at racetracks
  • Investment advisory or investment banking services
  • Real estate brokerage
  • Title insurance and real estate closings
  • Trade union activities
  • Marijuana-related businesses, or any other activity FinCEN specifies later4FFIEC BSA/AML InfoBase. Assessing Compliance with BSA Regulatory Requirements – Transactions of Exempt Persons

Filing and Maintaining the Designation

For listed companies, their subsidiaries, non-listed businesses, and payroll customers, the bank files FinCEN Form 110, the Designation of Exempt Person (DOEP), electronically through the BSA E-Filing System. The initial filing is due no later than 30 days after the first transaction the bank wants to exempt.7Financial Crimes Enforcement Network. FinCEN Designation of Exempt Person (FinCEN Form 110) Electronic Filing Instructions Form 110 has three filing types: initial, amended, and revocation. Material changes call for an amended filing referencing the original document control number. Loss of eligibility calls for a revocation. No DOEP is filed for other banks or government bodies.

Annual Reviews

Banks must review each exempt customer’s continued eligibility at least once a year. For listed companies, that means confirming the stock is still traded on a qualifying exchange. For non-listed businesses and payroll customers, the review must confirm the transaction-frequency, account-history, and revenue tests are still met.1Financial Crimes Enforcement Network. Guidance on Determining Eligibility for Exemption from Currency Transaction Reporting Requirements Between annual reviews, absent specific knowledge to the contrary, the bank may keep treating the customer as exempt.4FFIEC BSA/AML InfoBase. Assessing Compliance with BSA Regulatory Requirements – Transactions of Exempt Persons

Biennial Renewals for Phase II

Non-listed businesses and payroll customers need one additional step. The DOEP has to be renewed every two years. The first renewal is due by March 15 of the second calendar year after the initial designation, and every other March 15 after that.6Financial Crimes Enforcement Network. Amendment to the Bank Secrecy Act Regulations – Exemptions from the Requirement to Report Transactions in Currency – Phase II Each renewal certifies that the bank has applied its suspicious-activity monitoring to the account at least annually and reports any change of control the bank knows or should know about.

Recordkeeping

Records supporting each designation, including the DOEP itself, the eligibility documentation, and each annual review, must be kept for five years from the date of designation.8FFIEC BSA/AML Examination Manual. Appendix P – BSA Record Retention Requirements

When Exempt Status Ends

A listed company loses its exemption automatically if it stops being publicly traded, whether through going private, delisting, or merging into a non-public entity.1Financial Crimes Enforcement Network. Guidance on Determining Eligibility for Exemption from Currency Transaction Reporting Requirements The bank should catch that at the annual review, but must act promptly and file a revocation DOEP as soon as it learns of the change.

For non-listed businesses and payroll customers, the bank can voluntarily revoke the exemption at any time by filing an updated Form 110. Typical triggers are a shift in revenue mix that pushes ineligible-activity revenue above 50 percent, a significant drop in cash-transaction volume, or a change in ownership that surfaces during review.

Safe Harbor and Penalties

A bank that follows the exemption rules in good faith is not liable for failing to file a CTR on an exempt customer’s transaction, unless it knowingly provided false or incomplete information or had reason to believe the customer no longer qualified.4FFIEC BSA/AML InfoBase. Assessing Compliance with BSA Regulatory Requirements – Transactions of Exempt Persons That safe harbor is what makes the program workable for compliance teams.

On the other side, exempting a customer improperly, skipping annual reviews, or missing DOEP filings can lead to serious consequences. Willful BSA reporting violations can bring criminal fines up to $250,000 and up to five years in prison for responsible individuals, rising to $500,000 and 10 years if tied to other illegal activity. The institution itself can face criminal fines up to $1 million or twice the value of the transaction, whichever is greater.9FFIEC BSA/AML Manual. Introduction Civil penalties from FinCEN for willful anti-money-laundering program failures, which include CTR filing and exemption compliance, can exceed $71,000 per violation, with the exact figure adjusted for inflation.

Structuring Is Not a Substitute

Customers sometimes try to break cash transactions into smaller pieces to stay under $10,000. That is structuring, and it is a federal crime whether or not the underlying funds are clean. The maximum sentence is five years, rising to ten years if the structuring involves more than $100,000 in a 12-month period or is linked to other illegal activity.10Office of the Law Revision Counsel. 31 U.S. Code 5324 – Structuring Transactions to Evade Reporting Requirement Prohibited A customer with legitimate large cash needs is usually the exact profile the exemption program was designed for, and the right conversation is with the bank, not around it.